Abstract
Does corporate social responsibility (CSR) evaluation by third-party entities (i.e., external agencies, including civic organizations) affect the CSR performance of firms? This article explores the question of whether and how third-party CSR ratings change the subsequent CSR behavior and hence performance of rated firms. Combining insights from the research on ratings/rankings and a behavioral theory of firms, we hypothesize that firms with large negative CSR rating gaps—i.e., CSR ratings below the industry average—are more prone to improving their subsequent CSR behavior, and hence performance ratings, than those with small negative gaps, because of the desire to avoid being viewed as CSR laggards relative to their industry rivals. As a result, efforts are directed at enhancing CSR performance. Empirical support for this conjecture is found through random effect regression analyses of publicly listed firms in Korea that were rated by the KEJI (Korean Economic Justice Institute) during 2011–2015 with respect to multiple dimensions of CSR. Further results show that the positive effect of negative CSR rating gaps on subsequent CSR ratings appears only in the firms without well-established reputations, suggesting the possibility that firms with weak reputations have stronger incentives to keep up with other industry incumbents in CSR performance ratings than their counterparts.
Highlights
Recent years have witnessed the proliferation of various corporate social responsibility (CSR) ratings across the globe
The Dow Jones Sustainability Indices (DJSI), the indices resulting from the assessment of the CSR performance of a collection of large companies listed on the Dow Jones Market Index, are a nice exemplary that is often regarded as one of the most influential indicators affecting the decisions of the investment community
We suggest that this is so because, unlike the managers of the firms with negative CSR rating gaps who are more likely to be anxious about enhancing their future CSR performance to avoid being viewed as CSR laggards, the managers of the firms that are already performing well compared with their industry rivals are less likely to be anxious about enhancing their future CSR performance, and more likely to be satisfied with the status quo
Summary
Recent years have witnessed the proliferation of various corporate social responsibility (CSR) ratings (and rankings) across the globe. Combining insights from the research on ratings/rankings [1,2,3,4,5,6,7,8] and a behavioral theory of the firm [9,10,11,12,13,14,15], we hypothesize that rated firms are more likely to enhance their subsequent CSR behavior, and performance ratings, when their negative CSR rating gaps—CSR ratings below the industry average—are large rather than small, while positive CSR rating gaps—CSR ratings above the industry average—are unlikely to change their subsequent behavior. We believe that our empirical context serves as an attractive setting to test our hypotheses, largely because the societal demand for ethical conduct from local companies has peaked in Korea during the last two decades Such calls for corporate social responsibility in turn has been placing great pressures on many firms, especially firms under third-party scrutiny, to pay a great deal of attention to their CSR-related practices. Our study fills a gap in the literature on CSR by shedding further light on the sources of firms’ CSR performance that exist beyond organizational boundaries
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